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Stocks Rally, Bonds Tumble as China Manufacturing Rebounds, Inflation Weighs

  • Bonds squeezed by hotter European inflation
  • China PMI highest since April 2012
  • Dollar slips; pound and euro rise

LONDON, SINGAPORE March 1 (Reuters) - World stocks rebounded on Wednesday after China's manufacturing activity expanded at the fastest pace in more than a decade, while stronger-than-expected inflation numbers across the euro zone battered government bonds.

Inflation data from German regions, a day after February numbers showed price pressures surged more than expected across France and Spain, stoked fears that the European Central Bank would need to raise rates further.

Germany's 2-year government bond yield , highly sensitive to changes in interest rate expectations, rose to its highest since October 2008 at around 3.20%, and was last up 8 basis points (bps) on the day. Bond yields rise as prices fall.

"The surprises in January inflation releases have challenged hopes for a smooth return to target inflation," said Bruno Schneller, a managing director at INVICO Asset Management.

Sticky inflation might compel central banks to raise rates further in order to prevent further economic damage, he said.

"Consequently, the risk of policy-driven recessions could rise," he added.

Two-year Treasury yields , a guide to short-term U.S. rate expectations, were close to four-month highs, but at 4.85%, are below a November peak around 4.88%.

The next flush of economic indicators are likely to be crucial as markets gauge whether future rate hikes are sufficiently priced in now.


Meanwhile stock markets looked beyond Europe, cheered by numbers from China's factory sector, which grew in February at the fastest pace in more than a decade (an outlier in Asia, where manufacturing growth stalled elsewhere).

China's official manufacturing purchasing managers' index (PMI) stood at 52.6 last month against 50.1 in January and was well ahead of an analyst forecast for 50.5, giving investors hope that China's recovery can offset a global slowdown.

MSCI's broadest index of Asia-Pacific shares outside Japan jumped 2.2% earlier to leave behind a two-month low.

The index provider's broader world stock offering last rose 0.4%. European stocks followed suit. The continent-wide STOXX 600 rose 0.1% by 0955 GMT, kicking off the month on steady ground following a solid start to the year.

A flurry of earnings had Nivea maker Beiersdorf forecasting slower sales growth after a bumper 2022, while logistics group Kuehne und Nagel reported a 43% drop in Q4 operating profit and Just Eat swung to a small 2022 core profit.

U.S. stocks were expected to reverse a downward week with S&P futures up 0.2%.

"The China February PMI data this time has assumed even greater importance due to the usual lack of January/February hard data until later this month," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

In currency markets, the dollar's February gains seem to have run out of steam and European and Asia Pacific currencies advanced on the strength of the Chinese data.

The pound and euro both were last up 0.4% and 0.7% against the dollar respectively.

Brent crude futures were last down 0.5% at $83.06 a barrel.

Geopolitics also kept nerves elevated in the background.

U.S. President Joe Biden's visit to Kyiv and Russian President Vladimir Putin's abandonment of the last remaining nuclear arms control treaty with the U.S. signalled a hardening of positions.

China, which signalled support for Russia by sending its top diplomat to Moscow last week, has issued a call for peace, though it has been met with scepticism and Washington has said in recent days it worries that China could send arms to Russia.

"Should Beijing send Russia arms, it risks a rapid geopolitical breaking of the world economy," said Rabobank's research head, Jan Lambregts. "Markets have not even begun to contemplate what this might mean."

Reporting by Nell Mackenzie and Tom Westbrook; Editing by Dhara Ranasinghe and Sharon Singleton

Source: Reuters

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